Mega Brands delays report

1st-quarter results postponed following recall, Tribune series

Mega Brands, the maker of Magnetix toys, Monday delayed releasing first-quarter results in the wake of a Chicago Tribune series on injuries and one death linked to its magnetic building sets.

The Canadian toymaker, which had told investors it would release its first-quarter earnings Tuesday, postponed announcing those results until Friday. The company cited the expanded recall of Magnetix in April and "associated media reports."

"In light of these events," the company said in a news release that it was "currently assessing the financial impact of the expanded recall on its financial results."

The Tribune series last week chronicled the flawed recall of Magnetix toys, which were linked to one child's death and serious intestinal injuries to 27 others. The U.S. Consumer Product Safety Commission initially announced a limited recall of 3.8 million boxes of Magnetix in March 2006. In April, it expanded that recall to cover an additional 4 million boxes after the federal safety agency admitted it received more than 1,500 reports of magnets coming loose from the toy. If a child swallows the loose, aspirin-size magnets, they can connect in the intestines and twist or tear the bowels.

But even the April recall alert confused retailers and consumers. The Tribune bought recalled versions of the toys from many major stores and online retailers after they were supposed to be cleared from shelves.

Some of Mega Brands' largest customers -- including Wal-Mart and Toys "R" Us -- suspended sales of Magnetix building sets in response to the Tribune report. In legal filings, Mega Brands cited the Magnetix toy line as a major reason behind its July 2005 acquisition of Rose Art Industries, and it remains a key product for the toymaker.

The safety agency, known as the CPSC, insisted that only Magnetix boxes pre-printed with a label cautioning parents about the dangers of internal injuries are excluded from the recall. That pre-printed label, the agency said, signifies the toys inside have been engineered to assure the magnets are less likely to fall out.

Retailers said Mega Brands told them it was fine to sell boxes with a caution sticker attached rather than pre-printed on the boxes. Alerted to this practice, the CPSC contacted retailers to clarify that such stickers were never part of its recall plan.

Mega Brands repeatedly has said its toys are safe. A Mega Brands attorney last week said the company agreed to work with retailers to remove all Magnetix boxes without the pre-printed caution labels "in the interest of minimizing any confusion for consumers."

One investment analyst expressed worry that Mega Brands' handling of the recall could damage its relationship with its largest customers.

"While a full pull-out by retailers seems unlikely, we fear that retailers' 'patience' may be tested with all the Magnetix woes, especially now that they appear to be 'caught in the middle' between Mega Brands and the CPSC," Desjardins Securities Jessy Hayem wrote last week. "We also believe that the mounting public criticism against the CPSC may prompt a more aggressive stance on its part with both manufacturers and retailers going forward."

Mega Brands shares fell 4 percent Monday on the Toronto Stock Exchange on news of the postponement of its first-quarter results.